Utah Administrative Code
Topic - Natural Resources
Title R649 - Oil, Gas and Mining; Oil and Gas
Rule R649-3 - Drilling and Operating Practices
Section R649-3-1 - Bonding
Universal Citation: UT Admin Code R 649-3-1
Current through Bulletin 2024-18, September 15, 2024
1. An owner or operator shall furnish a bond to the division prior to approval of a permit to drill a new well, reenter an abandoned well or assume responsibility as operator of existing wells.
1.1. An owner or
operator shall furnish a bond to the division on Form 4, for wells located on
lands with fee or privately owned minerals.
1.2. An owner or operator shall furnish
evidence to the division that a bond has been filed in accordance with state,
federal or Indian lease requirements and approved by the appropriate agency for
any wells located on state, federal or Indian leases.
2. A bond furnished to the division shall be payable to the division and conditioned upon the faithful performance by the operator of the duty to plug each dry or abandoned well, repair each well causing waste or pollution, and maintain and restore the well site.
3. Bond liability shall be for the duration of the drilling, operating and plugging of the well and restoration of the well site.
3.1. The bond for drilling or operating
wells shall remain in full force and effect until liability thereunder is
released by the division.
3.2.
Release of liability shall be conditioned upon compliance with the rules and
orders of the board.
4. For any drilling or operating wells, the bond amounts for individual wells and blanket bonds required in Subsections (5) and (6) represent base amounts adjusted to year 2002 average costs for well plugging and site restoration. The base amounts are effective immediately upon adoption of this bonding rule, subject to division notification as described in Subsection (4.1).
4.1. The division shall provide written
notification to each operator of the need to revise or establish bonds in
amounts required by this bonding rule.
4.2. Within 120 days of such notification by
the division, the operator shall post a bond with the division in compliance
with this bonding rule.
4.3. If the
division finds that a well subject to this bonding rule is in violation of
Section
R649-3-36,
Shut-in and Temporarily Abandoned Wells, the division shall require a bond
amount for the applicable well in the amount of actual plugging and site
restoration costs.
4.4. The
division shall provide written notification to an operator found in violation
of Section
R649-3-36,
and identify the need to establish increased bonding for shut-in wells.
4.4.1. Within 30 days of notification by the
division, the operator shall submit to the division an estimate of plugging and
site restoration costs for division review and approval.
4.4.2. Upon review and approval of the cost
estimate, the division will provide a notice of approval back to the operator
specifying the approved bond amount for shut-in wells.
4.4.3. Within 120 days of receiving such
notice of approval, the operator shall post a bond with the division in
compliance with this bonding rule.
5. The bond amount for drilling or operating wells located on lands with fee or privately owned minerals shall be one of the following:
5.1. For wells of less than 1,000
feet in depth, an individual well bond in the amount of at least $1,500, for
each such well.
5.2. For wells of
more than 1,000 feet in depth but less than 3,000 feet in depth, an individual
well bond in the amount of at least $15,000 for each such well.
5.3. For wells of more than 3,000 feet in
depth but less than 10,000 feet in depth, an individual well bond in the amount
of at least $30,000 for each such well.
5.4. For wells of more than 10,000 feet in
depth, an individual well bond in the amount of at least $60,000 for each such
well.
6. If, prior to the July 1, 2003 revision of this bonding rule, an operator is drilling or operating more than one well on lands with fee or privately owned minerals, and a blanket bond was furnished and accepted by the division in lieu of individual well bonds, that operator shall remain qualified for a blanket bond with the division subject to the amounts described by this bonding rule.
6.1. A blanket bond shall be conditioned in a
manner similar to individual well bonds and shall cover any wells that the
operator may drill or operate on lands with fee or privately owned minerals
within the state.
6.2. For wells of
less than 1,000 feet in depth, a blanket bond in the amount of at least $15,000
shall be required.
6.3. For wells
of more than 1,000 feet in depth, a blanket bond in the amount of at least
$120,000 shall be required.
6.4.
Subsequent to the July 1, 2003 revision of this rule, operators who desire to
establish a new blanket bond that consists either fully or partially of a
collateral bond as described in subsection 10.2. shall be qualified by the
division for such blanket bond.
6.4.1.
Operators who elect to establish a surety bond as a blanket bond shall not
require qualification by the division.
6.4.2. In those cases where operator
qualification for blanket bond is required, the division will review the
following criteria and make a written finding of the operator's adequacy to
meet the criteria before accepting a new blanket bond:
6.4.3. The ratio of current assets to current
liabilities shall be 1.20 or greater, as evidenced by audited financial
statements for the previous two years and the most current quarterly financial
report.
6.4.4. The ratio of total
liabilities to stockholder's equity shall be 2.50 or less, as evidenced by
audited financial statements for the previous two years and the most current
quarterly financial report.
7. If an operator desires bond coverage in a lesser amount than required by these rules, the operator may file a request for agency action with the board for a variance from the requirements of these rules.
7.1. Upon proper notice and hearing
and for good cause shown, the board may allow bond coverage in a lesser amount
for specific wells.
8. If after reviewing an application to drill or reenter a well or when reviewing a change of operator for a well, the division determines that bond coverage in accordance with these rules will be insufficient to cover the costs of plugging the well and restoring the well site, the division may require a change in the form or the amount of bond coverage. In such cases, the division will support its case for a change of bond coverage in the form of written findings to the operator of record of the well and provide a schedule for completion of the requisite changes.
8.1 Appeals of mandated
bond amount changes will follow procedures established by Section R649-10,
Administrative Procedures.
9. The bond shall provide a mechanism for the surety or other guarantor of the bond, to provide prompt notice to the division and the operator of any action alleging the insolvency or bankruptcy of the surety or guarantor, or alleging any violations that would result in suspension or revocation of the suretys or guarantor's charter or license to do business.
9.1. Upon the incapacity of the surety or
guarantor to guarantee payment of the bond by reason of bankruptcy, insolvency,
or suspension or revocation of a charter or license, the operator shall be
deemed to be without bond coverage.
9.2. Upon notification of insolvency or
bankruptcy, the division shall notify the operator in writing and shall specify
a reasonable period, not to exceed 90 days, to provide bond coverage.
9.3. If an adequate bond is not furnished
within the allowed period, the operator shall be required to cease operations
immediately, and shall not resume operations until the division has received an
acceptable bond.
10. The division shall accept a bond in the form of a surety bond, a collateral bond or a combination of these bonding methods.
10.1.
A surety bond is an indemnity agreement in a sum certain payable to the
division, executed by the operator as principal and which is supported by the
performance guarantee of a corporation authorized to do business as a surety in
Utah.
10.1.1. A surety bond shall be executed
by the operator and a corporate surety authorized to do business in Utah that
is listed in "A.M. Best's Key Rating Guide" at a rating of A- or better or a
Financial Performance Rating (FPR) of 8 or better, according to the "A.M.
Best's Guide". Surety companies also will be continuously listed in the current
issue of the U.S. Department of the Treasury Circular 570. Operators who do not
have a surety bond with a company that meets the standards of subsection
10.1.1. will have 120 days from the date of division notification after
enactment of the changes to subsection 10.1.1., or face enforcement action.
When the division in the course of examining surety bonds notifies an operator
that a surety company guaranteeing its performance does not meet the standards
of Subsection (10.1.1), the operator has 120 days after notice from the
division by mail to correct the deficiency, or face enforcement
action.
10.1.2. Surety bonds shall
be noncancellable during their terms, except that surety bond coverage for
wells not drilled may be canceled with the prior consent of the
division.
10.1.3. The division
shall advise the surety, within 30 days after receipt of a notice to cancel a
bond, whether the bond may be canceled on an undrilled
well.
10.2. A collateral
bond is an indemnity agreement in a sum certain payable to the division,
executed by the operator that is supported by one or more of the following:
10.2.1. A cash account.
10.2.1.1. The operator may deposit cash in
one or more accounts at a federally insured bank authorized to do business in
Utah, made payable upon demand only to the division.
10.2.1.2. The operator may deposit the
required amount directly with the division.
10.2.1.3. Any interest paid on a cash account
shall be retained in the account and applied to the bond value of the account
unless the division has approved the payment of interest to the
operator.
10.2.1.4. The division
shall not accept an individual cash account in an amount in excess of $100,000
or the maximum insurable amount as determined by the Federal Deposit Insurance
Corporation.
10.2.2.
Negotiable bonds of the United States, a state, or a municipality.
10.2.2.1. The negotiable bond shall be
endorsed only to the order of and placed in the possession of the
division.
10.2.2.2. The division
shall value the negotiable bond at its current market value, not at face
value.
10.2.3. Negotiable
certificates of deposit.
10.2.3.1. The
certificates shall be issued by a federally insured bank authorized to do
business in Utah.
10.2.3.2. The
certificates shall be made payable or assigned only to the division both in
writing and upon the records of the bank issuing the certificate.
10.2.3.3. The certificates shall be placed in
the possession of the division or held by a federally insured bank authorized
to do business in Utah.
10.2.3.4.
If assigned, the division shall require the banks issuing the certificates to
waive any rights of setoff or liens against those certificates.
10.2.3.5. The division shall not accept an
individual certificate of deposit in an amount in excess of $100,000 or the
maximum insurable amount as determined by the Federal Deposit Insurance
Corporation.
10.2.4. An
irrevocable letter of credit.
10.2.4.1.
Letters of credit shall be placed in the possession of and payable upon demand
only to the division.
10.2.4.2.
Letters of credit shall be issued by a federally insured bank authorized to do
business in Utah.
10.2.4.3. Letters
of credit shall be irrevocable during their terms.
10.2.4.4. Letters of credit shall be
automatically renewable or the operator shall ensure continuous bond coverage
by replacing letters of credit, if necessary, at least 30 days before their
expiration date with other acceptable bond types or letters of
credit.
11. The required bond amount specified in Subsections (5) and (6) of any collateral posted as assurance under this section shall be subject to a margin determined by the division which is the ratio of the face value of the collateral to market value, as determined by the division.
11.1. The margin shall reflect
legal and liquidation fees, as well as value depreciation, marketability and
fluctuations that might affect the net cash available to the division to
complete plugging and restoration.
12. The market value of collateral may be evaluated at any time, and in no case shall the market value of collateral be less than the required bond amount specified in Subsections (5) and (6).
12.1. Upon evaluation of the market value of
collateral by the division, the division will notify the operator of any
required changes in the amount of the bond and shall allow a reasonable period,
not to exceed 90 days, for the operator to establish acceptable bond
coverage.
12.2. If an adequate bond
is not furnished within the allowed period the operator shall be required to
cease operations immediately and shall not resume operations until the division
has received an acceptable bond.
13. Persons with an interest in collateral posted as a bond, and who desire notification of actions pursuant to the bond, shall request the notification in writing from the division at the time collateral is offered.
14. The division may allow the operator to replace existing bonds with other bonds that provide sufficient coverage.
14.1.
Replacement of a bond pursuant to this section shall not constitute a release
of bond under Subsection (15).
14.2. The division shall not allow liability
to cease under an existing bond until the operator has furnished, and the
division has approved, an acceptable replacement bond.
14.3. When the operator of wells covered by a
blanket bond changes, the division will review the financial eligibility of a
new operator for blanket bonding as described in Subsection (6.4), and the
division will make a written finding concerning the applicability of blanket
bonding to the prospective new operator.
14.4. Transfer of the ownership of property
does not cancel liability under an existing bond until the division reviews and
approves a change of operator for any wells affected by the transfer of
ownership.
14.5. If a transfer of
the ownership of property is made and an operator wishes to request a change to
a new operator of record for the affected wells, then the following
requirements shall be met:
14.5.1. The
operator shall notify the division in writing when ownership of any well
associated with the property has been transferred to a named transferee, and
the operator shall request a change of operator for the affected
wells.
14.5.2. The request shall
describe each well by reference to its well name and number, API number, and
its location, as described by the section, township, range, and county, and
shall also include a proposed effective date for the operator change.
14.5.3. The request shall contain the
endorsement of the new operator accepting such change of operator.
14.5.4. The request shall contain evidence of
the new operator's bond coverage.
14.5.5. The request may include a request to
cancel liability for the well included in the operator change that are listed
under the existing operator's bond upon approval by the division of an adequate
replacement bond in the name of the new operator.
14.6. Upon receipt of a request for change of
operator, the division will review the proposed new operator's bond coverage,
and if bond coverage is acceptable, the division will issue a notice of
approval of the change of operator.
14.6.1.
If the division determines that the new operator's bond coverage will be
insufficient to cover the costs of plugging and site restoration for the
applicable well, the division may deny the change of operator, or the division
may require a change in the form and amount of the new operator's bond coverage
in order to approve the change of operator. In such cases, the division will
support its case for a change of the new operator's bond coverage in the form
of written findings, and the division will provide a schedule for completion of
the requisite changes in order to approve the operator change. The written
findings and schedule for changes in bond coverage will be sent to both the
operator of record of the applicable well and the proposed new
operator.
14.7. If the
request for operator change included a request to cancel liability under the
existing operator's bond in accordance with Subsection (14.5.5), and the
division approves the operator change, then the division will issue a notice of
approval of termination of liability under the existing bond for the wells
included in the operator change. When the division has approved the termination
of liability under a bond, the original operator is relieved from the
responsibility of plugging or repairing any wells and restoring any well site
affected by the operator change.
14.8. If any of the wells covered by a bond
are affected by an operator change, the bond may be released by the division in
accordance with Subsection (15).
15. Bond release procedures are as follows:
15.1. Requests for release of a bond held by
the division may be submitted by the operator at any time after a subsequent
notice of plugging of a well has been submitted to the division or the division
has issued a notice of approval of termination of liability for well covered by
an existing bond.
15.1.1. Within 30 days
after a request for bond release has been filed with the division, the operator
shall submit signed affidavits from the surface landowner of any previously
plugged well site certifying that restoration has been performed as required by
the mineral lease and surface agreements.
15.1.2. If such affidavits are not submitted,
the division shall conduct an inspection of the well site in preparation for
bond release as explained in Subsection (15.2).
15.1.3. Within 30 days after a request for
bond release has been filed with the division, the division shall publish
notice of the request in a daily newspaper of general circulation in the city
and county of Salt Lake and in a newspaper of general circulation in the county
in which the proposed well is located.
15.1.4. If a written objection to the request
for bond release is not received by the division within 15 days after
publication of the notice of request, the division may release liability under
the bond as an administrative action.
15.1.5. If a written objection to the request
for bond release is received by the division within 15 days after publication
of the notice of request, the request shall be set for hearing and notice
thereof given in accordance with the procedural rules of the
board.
15.2. If
affidavits supporting the bond release application are not received by the
division in accordance with Subsection (15.1.1), the division shall within 30
days or as soon thereafter as weather conditions permit, conduct an inspection
and evaluation of the well site to determine if restoration has been adequately
performed.
15.2.1. The operator shall be
given notice by the division of the date and time of the inspection, and if the
operator is unable to attend the inspection at the scheduled date and time, the
division may reschedule the inspection to allow the operator to
participate.
15.2.2. The surface
landowner, agent or lessee shall be given notice by the operator of such
inspection and may participate in the inspection; however, if the surface
landowner is unable to attend the inspection, the division shall not be
required to reschedule the inspection in order to allow the surface landowner
to participate.
15.2.3. The
evaluation shall consider the adequacy of well site restoration, the degree of
difficulty to complete any remaining restoration, whether pollution of surface
and subsurface water is occurring, the probability of future occurrence of such
pollution, and the estimated cost of abating such pollution.
15.2.4. Upon request of any person with an
interest in bond release, the division may arrange with the operator to allow
access to the well site or sites for the purpose of gathering information
relevant to the bond release.
15.2.5. The division shall retain a record of
the inspection and the evaluation, and if necessary and upon written request by
an interested party, the division shall provide a copy of the
results.
15.3. Within 60
days from the filing of the bond release request, if a public hearing is not
held pursuant to Subsection (15.1.5), or within 30 days after such public
hearing has been held, the division shall provide written notification of the
decision to release or not release the bond to the following parties:
15.3.1. The operator.
15.3.2. The surety or other guarantor of the
bond.
15.3.3. Other persons with an
interest in bond collateral who have requested notification under Subsection
R649-3-1.13.
15.3.4. The persons
who filed objections to the notice of application for bond
release.
15.4. If the
decision is made to release the bond, the notification specified in Subsection
(15.3) shall also state the effective date of the bond release.
15.5. If the division disapproves the
application for release of the bond or portion thereof, the notification
specified in Subsection (15.3) shall also state the reasons for disapproval,
recommending corrective actions necessary to secure the release, and allowing
an opportunity for a public hearing.
15.6. The division shall notify the
municipality in which the well is located by certified mail at least 30 days
prior to the release of the bond.
16. The following guidelines will govern the forfeiture of bonds.
16.1. The division shall
take action to forfeit the bond if any of the following occur:
16.1.1. The operator refuses or is unable to
conduct plugging and site restoration.
16.1.2. Noncompliance as to the conditions of
a permit issued by the division.
16.1.3. The operator defaults on the
conditions under which the bond was accepted.
16.2. In the event forfeiture of the bond is
necessary, the matter will be considered by the board.
16.3. For matters of bond forfeiture, the
division shall send written notification to the parties identified in
Subsection (15.3), in addition to the notice requirements of the board
procedural rules.
16.4. After
proper notice and hearing, the board may order the division to do any of the
following:
16.4.1. Proceed to collect the
forfeited amount as provided by applicable laws for the collection of defaulted
bonds or other debts.
16.4.2. Use
funds collected from bond forfeiture to complete the plugging and restoration
of the well to which bond coverage applies.
16.4.3. Enter into a written agreement with
the operator or another party to perform plugging and restoration operations in
accordance with a compliance schedule established by the division as long as
such party has the ability to perform the necessary work.
16.4.4. Allow a surety to complete the
plugging and restoration, if the surety can demonstrate an ability to complete
the plugging and restoration.
16.4.5. Any other action the board deems
reasonable and appropriate.
16.5. In the event the amount forfeited is
insufficient to pay for the full cost of the plugging and restoration, the
division may complete or authorize completion of plugging and restoration and
may recover from the operator any costs of plugging and restoration in excess
of the amount forfeited.
16.6. In
the event the amount of bond forfeited was more than the amount necessary to
complete plugging and restoration, the unused funds shall be returned by the
division to the party from whom they were collected.
16.7. In the event the bond is forfeited and
there exists any unplugged well or wells previously covered under the forfeited
bond, then the operator must establish new bond coverage in accordance with
these rules.
16.8. If the operator
requires new bond coverage under the provisions of Subsection (16.7), then the
division will notify the operator and specify a reasonable period, not to
exceed 90 days, to establish new bond coverage.
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